nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒08‒23
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Estimating Demand with Multi-Homing in Two-Sided Markets By Pauline Affeldt; Elena Argentesi; Lapo Filistrucchi
  2. Industrial Organization of Health Care Markets By Benjamin R. Handel; Kate Ho
  3. The IO of Selection Markets By Liran Einav; Amy Finkelstein; Neale Mahoney
  4. Nonlinear Pricing with Finite Information By Dirk Bergemann; Edmund Yeh; Jinkun Zhang
  5. The concentration of digital markets: How to preserve the conditions for effective and undistorted competition? By Frédéric Marty
  6. Fighting Collusion: An Implementation Theory Approach By Azacis, Helmuts; Vida, Peter
  7. Third-Degree Price Discrimination in the Age of Big Data By Charlson, G.
  8. An Empirical Analysis of Pricing in the U.S. Broiler and Pork Industries By Bolotova, Yuliya V.
  9. Market Power in the United States Potato Industry By Bolotova, Yuliya V.
  10. Reputation and Market Structure in Experimental Platforms By Philip C. Solimine; R. Mark Isaac
  11. Sectoral inflation persistence, market concentration, and imperfect common knowledge By Ryo Kato; Tatsushi Okuda; Takayuki Tsuruga
  12. From Monopoly to Competition: Optimal Contests Prevail By Xiaotie Deng; Yotam Gafni; Ron Lavi; Tao Lin; Hongyi Ling
  13. Attention Please! Health Plan Choice and (In-)Attention By Tamara Bischof; Michael Gerfin; Tobias Mueller
  14. Vertical integration as a source of hold-up: An experiment By Marie-Laure Allain; Claire Chambolle; Patrick Rey; Sabrina Teyssier
  15. Headwinds and Tailwinds: Implications of Inefficient Retail Energy Pricing for Energy Substitution By Severin Borenstein; James B. Bushnell
  16. The Right to Repair: Patent Law and 3D Printing in Australia By Rimmer, Matthew
  17. Unobserved Heterogeneity, State Dependence, and Health Plan Choices By Ariel Pakes; Jack R. Porter; Mark Shepard; Sophie Calder-Wang
  18. No Free Launch: At-Risk Entry by Generic Drug Firms By Keith M. Drake; Robert He; Thomas McGuire; Alice K. Ndikumana

  1. By: Pauline Affeldt; Elena Argentesi; Lapo Filistrucchi
    Abstract: We empirically investigate the relevance of multi-homing in two-sided markets. First, we build a micro-founded structural econometric model that encompasses demand for differentiated products and allows for multi-homing on both sides of the market. We then use an original dataset on the Italian daily newspaper market that includes information on double-homing by readers to estimate readers’ and advertisers’ demand. The results show that an econometric model that does not allow for multi-homing is likely to produce biased estimates of demand on both sides of the market. In particular, on the reader side, accounting for multi-homing helps to recognize complementarity between products; on the advertising side, it allows to measure to what extent advertising demand depends on the shares of exclusive and overlapping readers.
    Keywords: two-sided markets, platforms, multi-homing, media, advertising
    JEL: C51 D43 L13 L82 M37
    Date: 2021
  2. By: Benjamin R. Handel; Kate Ho
    Abstract: In this paper we outline the tools that have been developed to model and analyze competition and regulation in health care markets, and describe particular papers that apply them to policy-relevant questions. We focus particularly on the I.O. models and empirical methods and analyses that researchers have formulated to address policy-relevant questions, although we also provide an overview of the institutional facts and findings that inform them. We divide the chapter into two broad sections: (i) papers considering competition and price-setting among insurers and providers and (ii) papers focused specifically on insurance and market design. The former set of papers is largely concerned with models of oligopolistic competition; it is often focused on the US commercial insurance market where prices are market-determined rather than being set administratively. The latter focuses on insurance market design with an emphasis on issues raised by asymmetric information, leading to adverse selection and moral hazard. In addition, we discuss the literature on consumer choice frictions in this market and the significant implications of those frictions for I.O. questions.
    JEL: I11 L13 L2
    Date: 2021–08
  3. By: Liran Einav; Amy Finkelstein; Neale Mahoney
    Abstract: This is an invited chapter for the forthcoming Volume 4 of the Handbook of Industrial Organization. We focus on "selection markets," which cover markets in which consumers vary not only in how much they are willing to pay for a product but also in how costly they are to the seller. The chapter tries to organize the recent wave of IO-related papers on selection markets, which has largely focused on insurance and credit markets. We provide a common framework, terminology, and notation that can be used to understand many of these papers, and that we hope can be usefully applied going forward.
    JEL: G22 L00 L13
    Date: 2021–07
  4. By: Dirk Bergemann (Cowles Foundation, Yale University); Edmund Yeh (Department of Electrical and Computer Engineering, Northeastern University); Jinkun Zhang (Department of Electrical and Computer Engineering, Northeastern University)
    Abstract: We analyze nonlinear pricing with finite information. We consider a multi-product environment where each buyer has preferences over a d-dimensional variety of goods. The seller is limited to offering a finite number n of d-dimensional choices. The limited menu reflects a finite communication capacity between the buyer and seller. We identify necessary conditions that the optimal finite menu must satisfy, for either the socially efficient or the revenue-maximizing mechanism. These conditions require that information be bundled, or "quantized," optimally. We introduce vector quantization and establish that the losses due to finite menus converge to zero at a rate of 1/n^2/^d. In the canonical model with one-dimensional products and preferences, this establishes that the loss resulting from using the n-item menu converges to zero at a rate proportional to 1/n^2.
    Keywords: Mechanism Design, Nonlinear Pricing, Multi-Dimension, Multi-Product, Private Information, Limited Information, Quantization, Information Theory
    JEL: D82 D83 D86
    Date: 2021–08
  5. By: Frédéric Marty
    Abstract: The policy initiatives announced on both sides of the Atlantic to complement competition rules focus on two key dimensions: the contestability of markets on the one hand and fairness in their functioning on the other. The underlying idea is that the market positions of Big Tech would be inexpugnable - insofar as high barriers to entry protect them from self-regulating competition and insofar as they would have regulatory power over their respective ecosystems. Competition for the market would no longer be free, and competition in the market would be distorted. Our purpose in this working paper is to discuss these two dimensions. Are digital markets still contestable, and is the competition in them still competition on the merits? Finally, we discuss the remedies proposed to address these two alleged phenomena. La concentration des marchés numériques : Comment préserver les conditions d'une concurrence effective pour le marché et d'une concurrence non faussée dans le marché ? Les initiatives politiques annoncées de part et d’autre de l’Atlantique pour compléter les règles de concurrence mettent l’accent sur deux dimensions essentielles : la contestabilité des marchés d’une part et la loyauté dans le fonctionnement dans leur fonctionnement d’autre part. L’idée sous-jacente est la suivante : les positions de marché des grandes entreprises du numérique seraient inexpugnables – dans la mesure où de fortes barrières à l’entrée les protègent d’un caractère auto-régulateur de la concurrence et dans la mesure où elles jouiraient d’un pouvoir de régulation sur leurs écosystèmes respectifs. La concurrence pour le marché ne serait plus libre et la concurrence dans le marché serait faussée. Notre propos dans ce document de travail est de discuter ces deux dimensions. Les marchés numériques sont-ils toujours contestables et la concurrence qui s’y exerce est-elle encore une concurrence par les mérites ? Nous discutons enfin les remèdes proposés pour répondre à ces deux phénomènes allégués.
    Keywords: contestability,fairness,loyalty,Big Tech,concentration,exclusionary abuses, contestabilité,loyauté de la concurrence,équité,Big Tech,concentration,abus d’éviction
    JEL: K21 L41
    Date: 2021–08–17
  6. By: Azacis, Helmuts (Cardiff Business School); Vida, Peter (Corvinus Institute for Advanced Studies, Corvinus University of Budapest)
    Abstract: A competition authority has an objective, which specifies what output profile firms need to produce as a function of production costs. These costs change over time and are only known by the firms. The objective is implementable if in equilibrium, the firms cannot collude on their reports to the competition authority. Assuming that the firms can only report prices and quantities, we characterize what objectives are one-shot and repeatedly implementable. We use this characterization to identify conditions when the competitive output is implementable. We extend the analysis to the cases when a buyer also knows the private information of firms and when the firms can supply hard evidence about their costs.
    Keywords: Collusion, Antitrust, (Repeated) Implementation, Monotonicity, Price-Quantity Mechanism, Hard Evidenc
    JEL: C72 C73 D71 D82 L41
    Date: 2021–08
  7. By: Charlson, G.
    Abstract: A platform holds information on the demographics of its users and wants maximise total surplus. The data generates a probability over which of two products a buyer prefers, with different data segmentations being more or less informative. The platform reveals segmentations of the data to two firms, one popular and one niche, preferring to reveal no information than completely revealing the consumer's type for certain. The platform can improve profits by revealing to both firms a segmentation where the niche firm is relatively popular, but still less popular than the other firm, potentially doing even better by revealing information asymmetrically. The platform has an incentive to provide more granular data in markets in which the niche firm is particularly unpopular or in which broad demographic categories are not particularly revelatory of type, suggesting that the profit associated with big data techniques differs depending on market characteristics.
    Keywords: Strategic interaction, network games, interventions, industrial organisation, platforms, hypergraphs
    JEL: D40 L10 L40
    Date: 2021–08–19
  8. By: Bolotova, Yuliya V.
    Abstract: During the recent decade a group of large meat processors in the U.S. broiler and pork industries implemented a series of production control practices at various stages of the broiler and pork supply chains. Direct and indirect buyers of broilers and pork filed class action antitrust lawsuits alleging that by implementing these production control practices the meat processors engaged in unlawful conspiracies with the purpose of fixing, increasing, and stabilizing prices of broilers and pork and thus violated Section 1 of the Sherman Act. The research presented in the paper conducts an econometric analysis of price behavior in the U.S. broiler and pork industries during the periods of alleged price-fixing cartels and prior (more competitive) periods. The empirical evidence presented in the paper suggests the following. The wholesale pricing of pork by pork processors is consistent with an oligopoly pricing during both the pre-cartel and cartel periods. The retail pricing of pork by food retailers is consistent with a perfectly competitive pricing during both analyzed periods. The retail pricing of broilers by food retailers is consistent with a monopoly pricing during the pre-cartel period and with a monopoly and an oligopoly pricing during the cartel period.
    Keywords: Agribusiness, Livestock Production/Industries
    Date: 2021–08
  9. By: Bolotova, Yuliya V.
    Abstract: The motivations for this case study are the U.S. potato industry developments involving the implementation of a potato supply management program by a nation-wide group of cooperatives of potato growers during the period of 2005-2010. This program aimed to mitigate potato oversupply adversely affecting profitability of potato growers and provide fair returns for potato growers. The potato supply management program raised legal issues leading to antitrust lawsuits filed by potato buyers against potato growers and their cooperatives, which resulted in a large settlement. The case study introduces economic, business, and legal issues surrounding the implementation of this potato supply management program. The case study also provides simple contemporary applications of economic models of the profit-maximizing behavior of firms with seller market power in the U.S. potato industry. The case study presents a theoretical framework, which explains conduct and performance of the U.S. potato industry in alternative market scenarios, and a basic market and price analysis. The intended audiences are undergraduate and graduate students, as well as extension and outreach audiences. A teaching note includes a set of discussion questions and suggested answers. The teaching note also discusses teaching objectives, teaching strategies, and student background knowledge.
    Keywords: Agricultural Finance, Production Economics
  10. By: Philip C. Solimine (Department of Economics and Department of Scientific Computing, Florida State University); R. Mark Isaac (Department of Economics, Florida State University)
    Abstract: In this paper we conduct a market experiment with the opportunity for sellers to send a nonbinding advertisement of their product quality. We examine the effects of including a reputation aggregation system for sellers in these markets. In order to closely match the setting of real-life markets, we conduct a laboratory experiment designed to emulate an online marketplace. In some sessions, we prompt buyers to respond to their purchases with a canonical "five-star" rating, and display the average rating to buyers in each round. We find substantial efficiency gains from the addition of the ratings system, but not enough to obtain fully efficient market outcomes. These efficiency gains come primarily through a decrease in false advertising behavior by the sellers, as they compete to build reputations. We structurally examine the formation of reputations by the sellers (with and without ratings) and the effect of these reputations on the decisions of buyers and sellers in the market. Using a bipartite network of transaction data, we will quantify the effects of ratings in promoting trust and supporting diverse, connected, and high quality markets.
    Keywords: Product Quality, Seller Reputation, Ratings, Experimental Market Design, Plat- forms, Adverse Selection
    JEL: L1 L2 D4 D8
    Date: 2021–08
  11. By: Ryo Kato; Tatsushi Okuda; Takayuki Tsuruga
    Abstract: Previous studies have stressed that inflation dynamics exhibit substantial dispersion across sectors. Using US producer price data, we present evidence that sectoral inflation persistence is negatively correlated with market concentration, which is difficult to reconcile with the prediction of the standard model of monopolistic competition. To better explain the data, we incorporate imperfect common knowledge into the monopolistic competition model introduced by Melitz and Ottaviano (2008). In the model, pricing complementarity among firms increases as market concentration decreases. Because higher pricing complementarity generates greater inflation persistence, our model successfully replicates the observed negative correlation between inflation persistence and market concentration across sectors.
    Date: 2020–03
  12. By: Xiaotie Deng; Yotam Gafni; Ron Lavi; Tao Lin; Hongyi Ling
    Abstract: We study competition among contests in a general model that allows for an arbitrary and heterogeneous space of contest design, where the goal of the contest designers is to maximize the contestants' sum of efforts. Our main result shows that optimal contests in the monopolistic setting (i.e., those that maximize the sum of efforts in a model with a single contest) form an equilibrium in the model with competition among contests. Under a very natural assumption these contests are in fact dominant, and the equilibria that they form are unique. Moreover, equilibria with the optimal contests are Pareto-optimal even in cases where other equilibria emerge. In many natural cases, they also maximize the social welfare.
    Date: 2021–07
  13. By: Tamara Bischof; Michael Gerfin; Tobias Mueller
    Abstract: We study the role of inattention as a key source of inertia in health plan choices. Our structural model shows that more than 90% of the elderly in Switzerland are inattentive and thus stick to their previous plan. We estimate sizeable switching costs even conditional on attention explaining part of the observed choice persistence. Inattention leads to overspending and generates considerable welfare losses for most consumers. A policy simulation shows that eliminating financially dominated plans from the choice set yields welfare gains for two thirds of individuals.
    Keywords: health plan choice, inertia, attention, switching costs, managed competition, elderly
    JEL: D12 G22 I13 D90 J14
    Date: 2021–08
  14. By: Marie-Laure Allain (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Claire Chambolle (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Patrick Rey (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Sabrina Teyssier (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes)
    Abstract: In a vertical chain in which two rivals invest before contracting with one of two competing suppliers, vertical integration can create holdup problems for the rival. We develop an experiment to test this theoretical prediction in a setup in which suppliers can either precommit ex ante to being greedy or degrade ex post the input they provide to their customer. Our experimental results confirm that vertical integration creates holdup problems. However, vertical integration also generates more departures from theory, which can be explained by bounded rationality and social preferences.
    Keywords: Vertical integration,Hold-up,Experimental economics,Bounded rationality,Social preferences
    Date: 2021–06–08
  15. By: Severin Borenstein; James B. Bushnell
    Abstract: Electrification of transportation and buildings to reduce greenhouse gas (GHG) emissions requires massive switching from natural gas and refined petroleum products. All three end-use energy sources are mispriced due in part to the unpriced pollution they emit. Natural gas and electricity utilities also face the classic natural monopoly challenge of recovering fixed costs while maintaining efficient pricing. We study the magnitude of these distortions for electricity, natural gas, and gasoline purchased by residential customers across the continental US. We find that the net distortion in pricing electricity is much greater than for natural gas or gasoline. In most of the country, residential electricity prices are well above social marginal cost (private marginal cost plus unpriced externalities), while in some areas with large shares of coal-fired generation, prices are below SMC. Combining our estimates of marginal price and SMC for each of the fuels with a large survey of California households' energy use, we calculate the distribution of annual fuel costs for space heating, water heating, and electric vehicles under actual pricing versus setting price at SMC. We find that moving prices for all three fuels to equal their SMC would significantly increase the incentive for Californians to switch to electricity for these energy services.
    JEL: H23 L51 L71 L94 L95
    Date: 2021–08
  16. By: Rimmer, Matthew (Queensland University of Technology)
    Abstract: Considering recent litigation in the Australian courts, and an inquiry by the Productivity Commission, this paper calls for patent law reform in respect of the right to repair in Australia. It provides an evaluation of the decision of the Full Court of the Federal Court in Calidad Pty Ltd v Seiko Epson Corporation [2019] FCAFC 115 – as well as the High Court of Australia consideration of the matter in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41. It highlights the divergence between the layers of the Australian legal system on the topic of patent law – between the judicial approach of the Federal Court of Australia and the Full Court of the Federal Court of Australia, and the endorsement of the patent exhaustion doctrine by the majority of the High Court of Australia. In light of this litigation, this paper reviews the policy approach taken by the Productivity Commission in respect of patent law, the right to repair, consumer rights, and competition policy. After the considering the findings of the Productivity Commission, it is recommended that there is a need to provide for greater recognition of the right to repair under patent law. It also calls for the use of compulsory licensing, crown use, competition oversight, and consumer law protection to reinforce the right to repair under patent law. In the spirit of modernising Australia’s regime, this paper makes a number of recommendations for patent law reform – particularly in light of 3D printing, additive manufacturing, and digital fabrication. It calls upon the legal system to embody some of the ideals, which have been embedded in the Maker’s Bill of Rights, and the iFixit Repair Manifesto. The larger argument of the paper is that there needs to be a common approach to the right to repair across the various domains of intellectual property – rather than the current fragmentary treatment of the topic.
    Date: 2021–08–09
  17. By: Ariel Pakes; Jack R. Porter; Mark Shepard; Sophie Calder-Wang
    Abstract: We provide a new method to analyze discrete choice models with state dependence and individual-by-product fixed effects and use it to analyze consumer choices in a policy-relevant environment (a subsidized health insurance exchange). Moment inequalities are used to infer state dependence from consumers’ switching choices in response to changes in product attributes. We infer much smaller switching costs on the health insurance exchange than is inferred from standard logit and/or random effects methods. A counterfactual policy evaluation illustrates that the policy implications of this difference can be substantive.
    JEL: C13 D12 I11 L60 M31
    Date: 2021–07
  18. By: Keith M. Drake; Robert He; Thomas McGuire; Alice K. Ndikumana
    Abstract: After receiving FDA approval, a generic drug manufacturer can launch “at risk” before conclusion of any patent infringement litigation, but it risks paying damages if it loses. The generic can eliminate the risk by waiting to launch until the appeals process is complete but waiting has downsides too. We develop a model that implies that, after the generic has won a district court decision, at-risk entry is generally profitable and will occur quickly unless the cost of waiting for the appeal is very low. We examine generic drug applications that have received FDA approval with “first-filer” status (which precludes later filing generics from entering before the first filer). In our data, the generic and brand usually settled prior to the conclusion of litigation. For the remainder, drugs that received FDA approval prior to a favorable district court decision were always launched at risk. Generics without FDA approval before a favorable district court decision launched upon approval unless the approval was close in time to the appeal decision or it had forfeited the first filer exclusivity (indicating a low cost of waiting). We also consider implications of at-risk entry for social welfare, arguing that at-risk entry is analogous to a “buy out” of the patent with favorable welfare implications in both the short run (consumer prices) and long run (efficient incentives for R&D).
    JEL: D22 I11 I18 O32
    Date: 2021–08

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